NovaLoca Blog

While you’re still reeling from yesterday’s record-busting retail letting on Oxford Street, here’s some more news on the market for retail space in the UK. Cushman & Wakefield says the average availability of retail premises on the top shopping streets in the UK fell to its lowest for 18 months at the start of August, reaching 9.8% compared with 11.1% in May.

C&W’s research includes shops held by retailers that are in administration, which accounted for 1.4% of the total stores surveyed. Its analysis covered the key retail streets of the UK’s main town and city centres – not including out-of-town shopping centres, factory outlet centres or retail parks. The group says that while caution persists, there has been a marginal improvement in retail market sentiment over the past six months, which appears to have filtered through to retail availability levels. “Stronger operators are capitalising on previous failures and expanding their market share,” C&W says. It thinks the worst of the “shake-out” among retailers as a result of the economic downturn is now over.

Looking at the retail centres individually, the lowest levels of available retail space at the start of August were in Central London (5.1%) and the North (7.7%). Outer London has the highest level of availability (17.4%), followed by the Midlands (12.1%) and Scotland (11.0%).

John Strachan, head of retail at Cushman & Wakefield, said: “The recent decline in retail availability, whilst marginal, is encouraging and we remain cautiously optimistic that the overall level of availability will continue to edge downwards in the coming months. However, it is clear that retailer demand and therefore availability will differ widely by location. For example, Central London continues to see very strong retailer demand, as do large cities such as Glasgow and Liverpool where availability has continued to fall. In contrast, some smaller towns continue to struggle to attract significant retailer interest and availability in these locations is expected to remain high for some time to come.”

We’re taking a few days off now – and like all property professionals we will of course be reading the BPF’s new Property Data Report on the beach…

Spanish fashion retailer Desigual has beaten off stiff competition for a key retail space on London’s Oxford Street, paying a record rent and suggesting that other retailers in the area may face sharp increases in their own rent levels. It has been clear for some time that retailers in the West End are enjoying buoyant sales, but this deal has nevertheless caused considerable comment and speculation.

Desigual is paying a Zone A (prime area) rate of just over £700 per sq ft for 360 Oxford St, a 7,000 sq ft site opposite the Bond St tube station, replacing the Disney Store which reportedly paid a Zone A rent of £540 per sq ft to landlord Prupim. The Sunday Telegraph notes that the new Desigual rent is well above the previous Oxford Street record of £615 per sq ft set by Sunglass Hut in 2009, and comes despite the economic downturn and worries about consumer spending.

The Sunday Telegraph says it understands that retailers on this key London shopping street have seen recent rent demands increased by 20%, while The Independent says shops on Oxford Street now face increases of as much as 40% in their rents as the Desigual deal will be used as a bargaining tool in future negotiations between occupiers and tenants.

Desigual is said to have beaten off three rivals to the site – Mango, another Spanish retailer; shoe retailer Aldo; and mobile phone group O2. The Disney store is moving down Oxford Street to a site previously occupied by fashion retailer Mexx.

DTZ says its new, forward-looking property index indicates that there are only three areas in the UK that currently offer commercial property investors attractive terms.

The group calculates these three areas as: office space in the City of London; prime retail property in Manchester; and retail premises in the West End of London, assuming they are held for the next five years.

DTZ created its Fair Value index based on 180 property markets worldwide. The group’s global head of research, Hans Vrensen, told The Times that although yields on City offices had dropped steadily, supply remained constrained. In particular, he noted, large floor spaces were hard to find, so DTZ is expecting to see rental growth coming through as the economy recovers.

The expected return on City office space according to the index is 10.9% compared with an estimated required return of 7.6%, making this a “hot” category – it implies that offices in the Square Mile are underpriced by 11.6%, according to DTZ. But compared with other European markets, the UK’s property market is relatively unattractive as yields have dropped during the past year or so. Hot global markets include Los Angeles retail property, Sydney offices and Antwerp industrial sites, the Times reports.

Shaftesbury, the listed REIT, has provided an illustration of the buoyant trading conditions in London’s West End, where its investment and development strategy is focused.

In sharp contrast to the cautious statements recently made by other property companies, and the commentaries indicating tough markets elsewhere in the UK, Shaftesbury said in a statement to the London Stock Exchange yesterday: “Despite the challenges evident in the wider economy, we are confident that the underlying strengths of the locations in which we invest and our management strategy will continue to deliver sustained outperformance in income and capital values.” 

The group, which owns more than 500 shops, restaurants, cafes and bars in the West End, said it had continued to experience good demand, particularly for its larger shops, well-located restaurants and residential accommodation, as the West End continued to flourish despite the uncertain economic outlook for the UK as a whole.

Shaftesbury said that as of 31 July, 72% of the space in its joint-venture St Martin’s Courtyard development in Covent Garden was either let, pre-let or under offer, and it had seen “active interest” in the remaining single restaurant and eight shops still available. The marketing of the remaining office space in the development was running ahead of completion, it added.

As at 31 July, the group had no available retail space among the larger shops in its portfolio(rent over £100,000 pa) and a total of 23 smaller shops (average rent £45,000 pa) were ready to let or under offer.

We’re not short at the moment of gloomy commentary on the outlook for UK commercial property – as well as the quarterly index from Jones Lang LaSalle showing a slowdown in returns and capital values, and the Savills development activity expectations index turning negative, we also have the latest CB Richard Ellis monthly index, which shows again that returns and capital growth slipped last month. One common theme among reports such as these is the sharp difference between the market in London – particularly for central London offices and prime retail positions – and the rest of the UK.

CBRE’s Monthly Index for July recorded total returns for all property of 0.9%, down from 1.1% in June, and capital growth of just 0.4%. Nearly all sectors of the market experienced a slowdown, CBRE says, except for central London offices. This segment boosted the overall returns for the offices sector to 1.2% with capital growth of 0.7%. Returns for retail were just 0.7% with capital values up 0.3%, while industrials bucked the trend with a small improvement on June’s figures – returns rose 0.8% and capital growth was 0.2%. Industrials are still, however, the weakest sector on a year-to-date basis.

Cushman & Wakefield’s recently published Marketbeat report also comments on the clear polarisation within the retail sector between the market for central London retail space, which has continued to report strong rental growth, and much of the rest of the UK, particularly parts of the north of England and the Midlands, where rents are still softening. In the offices market, while the strong recovery in central London has continued, with rents rising in the City and West End, the recovery has been patchy elsewhere – East Anglia, Scotland and the South West recorded some growth during Q2 but office rents were generally unchanged elsewhere, the group noted.

The outlook for commercial development activity has turned negative for the first time in 12 months, according to Savills, which has published its latest Commercial Development Activity report. The lack of funding for new projects and worries about the outlook for public-sector demand were cited by those surveyed as reasons for their negative viewpoint.

Savills says that the index measuring expectations of activity over the next three months dropped to minus 1.2% in July, down from +5.3% in June, thus recording the first negative result since July 2009. Of the three main sectors monitored, developers were most pessimistic about office activity, followed by retail & leisure, Savills says. On balance the firms surveyed expected growth in industrial/warehouse activity.

Savills says that while the pace of commercial property development activity rose in July, the increase was only marginal and followed a modest reduction in June. Growth was driven by private-sector demand, as public-sector development continued to fall sharply. The Total Commercial Development Activity Index – the net balance monitoring the overall performance of the UK commercial property sector – came in at +0.6% in July, up from minus 2.8% in June. The latest net balance was much lower than the long-term survey average of +5.3%.

More evidence has emerged of a slowdown in UK commercial property, as Jones Lang LaSalle says its Quarterly Index recorded a fall in all-property total returns to 3.6% for the second quarter, from 6.2% in the first quarter.

Capital values grew 2.0%, also slower than in the first quarter, as the pace of yield compression continued to diminish, JLL noted. The group said the retail sector recorded the strongest returns in Q2, at 4.1%, reflecting capital value growth of 2.5%. Returns for the office sector were 3.8% and for the industrial sector 2.0%.

Average rental growth for all property continued to slip, coming in at minus 0.1% in Q2, but this hides the differences between sectors – offices continued to record growth in rents, up 0.1%, while industrial rents fell 0.4% and retail rents dipped 0.2%. The stronger office sector figure reflects the “considerable improvement” in rents for City and West End offices, the group pointed out.

Mike Penlington, director in JLL’s valuation advisory team, said the group expected price discrimination to remain substantial, as the weight of money that had fuelled investor demand at the start of the year tailed off. He added that investors would try to identify opportunities “in a market where rents and values for assets in weaker locations will remain under downward pressure.”

After yesterday’s results from CSC, here’s some more shopping-centre news. Cushman & Wakefield says yields for prime assets in this sector improved to 5.5% over the second quarter this year, as investment demand has outstripped supply. Yields for smaller and more secondary shopping centres, however, remained relatively static during the quarter, with vacancy rates and falling rents continuing to suppress value.

Charlie Barke, head of retail investment at Cushman & Wakefield, said: “The first half of the year has seen significant yield improvement across the sector, fuelled by investment demand exceeding supply. Looking ahead, demand looks a little thinner and supply appears to be increasing. Whilst prime stock will probably hold up reasonably well, we are concerned about a potential slip in secondary values as the year draws to an end.”

Turnover in the sector during Q2 2010 was similar to the previous quarter, at £673m, but made up of fewer deals – 12 in total, representing 16 shopping centres.

C&W says there are just under £1.1bn of schemes on the market at the moment, including the Ewart properties (Hammersmith, Victoria and Fulham Broadway) with an asking price of £295m, a yield of 5.63%. A number of smaller schemes are either on or are coming to market, include properties in Ayr, St Austell and Dunstable, the group added.

Capital Shopping Centres today posted a 9% rise in NAV for the first half of the year, helped by a 6% increase in the value of its investment properties. Chairman Patrick Burgess said: “We are now looking to drive growth in net rental income from lettings, lease expiries and rent reviews, with a particular opportunity from converting last year’s short-term lets into longer-term lets at higher rents.”

In the first set of results published since the group demerged its non-shopping-centre operations, CSC said net rental income from continuing operations was up 1% with occupancy at 98%. The group, which includes the Lakeside and Metrocentre shopping centres in its portfolio, said footfall in the first half was up 3% year-on-year and 6% ahead of the position reported two years ago.

CSC said that it had the scope through lettings, lease expiries and rent reviews “to capture a 23% uplift from current contracted rents to our valuers’ assessments of ERV,” in particular as a result of retailers wanting high-quality space, which is scarce, and the strong demand for larger units in centres with the best catchments; and by turning temporary lets into longer leases.

“With around £125m of value-enhancing active management projects under consideration and around £500m of potential investment by way of major extensions, the group has significant scope to grow organically without depending on acquisitions,” Burgess added.

British Land today said it remained cautious about the near-term outlook as it reported a 2.2% increase in NAV to 515p per share for its first quarter, the three months to 30 June. The increase in the group’s portfolio valuation was just 1.4%, reflecting the more uncertain economic outlook.

The shortage of available Grade A office space in London continued to drive rental growth in the City and the West End, with rental values up 2.4% during the quarter. The group said occupancy in its offices portfolio had risen 4% to 96.6% during the quarter and it had let 800,000 sq ft of prime London office space during the first half of 2010, with rental levels significantly higher now than they were a year ago.

Rental activity was weaker in the group’s retail portfolio, as occupiers have become more cautious about the outlook for consumer spending, the group noted. However, there was still good demand from retailers for space “in the right locations”. The occupancy rate for the retail portfolio was 98.6%.

Chief executive Chris Grigg said: “Rental growth in the London office market has been good in the last six months and we expect this trend to continue, albeit at a more modest rate, with lower levels of activity in the near term. Further pressure on rental levels in retail is forecast, but we remain of the view that the best locations, where our portfolio is focused, will significantly outperform secondary locations where the supply/demand tension remains weak.”

“Overall, risks to the global economy seem to have increased in recent months and we remain alert to the potential impact of the fiscal measures needed to address budget deficits not only in the UK, but across Europe. While we would not be immune from any material reduction in consumer spending and business confidence, our prime real estate, underpinned by good tenant credit quality and high occupancy, is expected to perform well.”